It’s the Best Investment in North America – and It Isn’t the United States
By Martin Hutchinson
Contributing Writer
Money Morning
The U.S. stock market has run up magnificently in the last six months. The U.S. economy has begun to recover, but its performance has fallen short of expectations.
And with good reason. The United States has a bigger and more-troubled financial sector than most countries. It also has a bigger overhang from the housing bubble, has a bigger balance-of-payments deficit and has a budget deficit that’s fat enough to stall the recovery.
It would be nice to have an economic recovery to invest in that didn’t have all of these problems.
Truth be told, such an investment play does exist. What’s more, the market I have in mind is advanced enough for us to invest in it without having to go through all the rigmarole of American Depository Receipt (ADR) investing. Nor will you have to make a potentially risky foray out onto some foreign stock exchange to buy the shares, because they are almost all listed here.
The country I’m talking about is Canada. Think of it as being like home – but without the problems that our home market (the United States) currently suffers from.
Our Healthy Neighbor to the North
When the recession struck, Canada was hit by it quite badly, but for different reasons from its southern neighbor. The Canadian housing market was nowhere near as overheated as its U.S. counterpart. So Canada’s housing downturn wasn’t as deep.
And what about the banking systems? To be sure, Canadian banks received a bailout, but it was less than $20 billion in total. Compare that to the veritable alphabet soup of U.S. bailout programs ranging from “TARP” and “TALF” that have injected more than $2 trillion into the U.S. financial system.
On the other hand, natural resources prices crashed last autumn, which had a major effect on Canada’s resource-based economy. A number of large projects in the Athabasca Tar Sands region were cancelled, for example – since this region has oil reserves around the size of the entire Middle East, its development is crucial to Canada’s future.
The “loonie,” Canada’s currency, declined from around “parity” to the U.S. dollar to an exchange ratio of C$1.30=$1 U.S. In effect, this was a “flight to safety” into the dollar and U.S. Treasuries. And it affected Canada as it did other countries.
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In 2009, however, Canada and the United States have traveled down totally different paths. Canada did very little “stimulus,” so its state budget is in much better shape. The deficit for the 2009-2010 fiscal year $53 billion (C$56 billion) is only about 4% of gross domestic product (GDP). For the 2010-2011 fiscal year, the deficit is expected to be about $42 billion (C$45 billion), or 3.2% of GDP.
Energy Powers the Rally
The bounce in natural resources prices has really helped power up the rebound of Canada’s market.
Investment in the tar-sands region has picked up again, with a big merger between the two largest tar-sands-extraction companies: Suncor Energy Inc. (NYSE: SU) and Petro-Canada. The rising gold price hasn’t hurt either – mines are appearing all over the place! All this new activity has made the loonie bounce, so it’s back to about C$1.07=$1. While interest rates are as low as the United States, the Bank of Canada hasn’t done much “quantitative easing,” meaning that inflation isn’t too much of a worry.
The strong loonie helps here, too.
Canada seems to be recovering nicely. Its index of leading indicators jumped 1.1% in August, while manufacturing sales grew 5.5% in July. The country presently runs a modest current account deficit, but it’s only 2% of GDP. That’s much lower than even the current U.S. deficit, let alone that of 2007. It had a little more public debt than the United States in 2008, but given current U.S. deficits, those two lines almost certainly have crossed by now.
There are two caveats. The first is an obvious one: If commodity prices crash to earth, Canada will have some difficulty because commodities are a large part of its economy. Personally, I don’t see that happening. It’s notable that PetroChina Co. Ltd. (NYSE ADR: PTR) has just invested $1.7 billion in a Canadian tar sands project, so China must not think so, either.
The other risk is political. The current minority Conservative government of Stephen Harper has done a good job, but the opposition Liberals have withdrawn their parliamentary support. That means there may be an election this autumn. A Liberal majority government would be no disaster. They might be a bit sticky about oil-drilling permits, but would not otherwise rock the boat.
However, a Liberal coalition with the leftist New Democrats could push public spending and the deficit up, and there’s no guarantee against that. (One of the problems with multi-party systems like Canada’s is there is an almost infinite variety of possible governments after each election, some of which can be fairly alarming from a business perspective.)
However, Canadian elections are a much smaller risk than you get in most countries, and the commodity/oil price crash, if it happened, would help the U.S. economy and, presumably, your U.S. portfolio. So it’s worth having some Canadian exposure, perhaps with the Canadian market exchange traded fund (ETF) iShare MSCI Canada Index (NYSE: EWC).
For years it was almost fashionable to dismiss Canada from an economic standpoint. Now, however, that may well be where the smart money would like to go. As an economy, Canada is competent and stable.
It’s the kind of country that looks to be a good place for some of our money.
[Editor's Note: As Money Morning Investment Director Keith Fitz-Gerald's market analysis demonstrates, success as an investor requires knowing when to act.
But it also requires knowing where to look.
Like under the Eiffel Tower.
The French Oil Ministry has confirmed there is a 40-billion-barrel reserve under that historic landmark - enough to fuel total U.S. oil demand for 5.2 years, according to the Energy Information Administration.
And a tiny U.S. company is poised to profit from this $2.8 trillion cache of crude. Opportunities such as this are the kind of potential profit plays that we focus on in our monthly affiliate newsletter, The Money Map Report. This publication tracks global money flows, and helps subscribers identify precisely where those capital flows intersect with some of the most powerful economic and financial trends at play today.
For more information on The Money Map Report, as well as on the oil cache beneath the Eiffel Tower, please click here.]
News and Related Story Links:
- Money Morning News Analysis:
Fed: Recession “Very Likely Over,” but Threats Remain. - Wikinvest:
American Depository Receipt. - FederalReserve.gov:
Term Asset-Backed Securities Loan Facility (TALF). - Wikipedia:
Troubled Assets Relief Program. - Wikipedia:
Athabasca Tar Sands. - Wikipedia:
The Loonie. - CBC News:
Merged Suncor, Petro-Canada ready to compete with ‘global supermajors.’ - Wikipedia:
Quantitative Easing. - Bank of Canada:
Official Web Site. - TradingMarkets.com:
PetroChina Eyeing Canadian Oil Sands Resources. - Wikipedia:
Stephen Harper.
Comment by Richard Hildebrand on 24 September 2009:
FOOD & RESOURCES –
The Keys to Canada’s Sustainable Economic Growth
We all think & worry about the commodities ALWAYS in demand & all becoming scarcer & therefore more valuable over long term cycles – but Canada has more than its share.
FOOD, FRESH WATER (to make food), ARABLE LAND
FOSSIL ENERGY – to do everything (out of favor POLITICALLY but by far the most economic transportable energy source) as in TAR SANDS, Conventional Oil & NATURAL GAS (Lots & Lots of it, not even counting the McKenzie [sic] Delta area). There will come a time where imported Canadian Gas will heat Northern IL, MI & WI
INDUSTRIAL & PRECIOUS METALS – do you like GOLD, SILVER, PLATINUM, or PALADIUM – if not, then you will just have to make do with DIAMONDS.
BUT FIRST LOOK AT HISTORY & WHERE THE GREAT
ANCIENT CIVILIZATIONS AROSE.
THE CRITICAL COMPONENT IN THE LONG TERM SUCCESS OF ALL CIVILIZATIONS GOING BACK 10,000 YEARS IS – FOOD, FOOD, FOOD!!!!
Readily available excess food provides high levels of physical & economic energy within the society, be it Egypt, Greece, Rome, China etc., and acts as a medium of trade for other valuable resources. The same holds true today, the US & Canada are the largest food exporters, have a copious amount of water & arable land to keep making more & more FOOD!! But when employing the economic energy derived from FOOD, Canada has a much more concentrated, undeveloped resource base to work with. US minerals & hydrocarbons have been exploited for hundreds of years, so you can now find only very high cost copper, steel, lead, & precious metals and all exist as a very widely disbursed resource. There are no longer mineral veins, now it is ZONES OF MINERALIZATION. Great – but that mineralization may be only 1 to 10 OUNCES per TON of ore. This is a VERY SERIOUS (as in Extremely Costly) recovery problem. Only societies with low cost fundament economic energy derived from a vast excess of food can provide the work (as in Labor & Capital) needed to convert the resource into valuable products & services.
In the ultimate all capital equipment has it genesis as a combination of labor and resource – trucks are produced from labor & metals. But the metals were made from ores & labor, in equipment made from materials & more labor. In the ultimate all economic activity is based on physical labor & resources. FOOD is the resource that requires the least amount of physical work & other resource to produce something of real value – the sustenance of life. As long as China, Europe, Russia & the other pretenders to world economic leadership can’t feed their own population & have to import more than of their resources, they will have to subsidize there economic growth thru very high taxes either financial (e.g. Europe), a physical tax as in very low wages (China & third 3rd world).
Dick Hildebrand
Comment by Josh at NRDC on 24 September 2009:
While no mention of the environmental costs were included in this writeup—they should have been. This is a case where the investment and environmental interests are similar. Consider the liabilities…
Tar sands come with insanely high carbon liabilities. This is a fuel source that even its most ardent supporters admit is the dirtiest oil on the planet—even when compared with world’s other most-carbon intensive fuel sources on the planet, bitumen is found lacking. Canadian studies show it 9-40% worse than the heaviest of crudes on the planet. Other research shows tar sands as 3X the carbon of more typical petroleums. With discussions in DC and Copenhagen looming, these are issues that must be considered.
And there are pollution issues that will need to be resolved on both sides of the borders.
And efficiency…for every barrel of tar sands oil, two tons of earth and sand must be mined and six barrels of fresh water wasted. Again, industry supporters point to recycling programs and efforts towards efficiency—but there are litterally 50+ square miles of toxic lakes that have been created in Alberta to hold the mining pollution. More liability that must be considered as remediation will eventually be necessary as the noxious stew impacts ground water supplies in the region. There are newer technologies in play, but they will not completely replace surface mining and have not been as effective as advertised so far.
And of course there are the moral issues. Don’t take my word for it—plenty of folks have a problem with this stuff:
The Archbishop of the region had his issues with the way this resource is being extracted, its impact on the environment, and the nearby communities: http://www.edmontonjournal.com/Technology/Bishop+spurns+oilsands+development/1221786/story.html
So did the UN: http://theendisalwaysnear.blogspot.com/2008/05/slow-motion-oil-spill.html
As do nearby First Nations communities downstream from the tar sands mines who seem to be suffering from exotic cancers at unusually high rates: http://switchboard.nrdc.org/blogs/mnakagawa/a_cause_for_alarm_in_community.html
And so did the US Conference of Mayors: http://docs.nrdc.org/air/files/air_08062301a.pdf
And note the comments of the head of the IPCC this week…
Some things to consider before considering this stuff, or presenting it in such gilded fashion…
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[...] there is our northern neighbor, Canada. Canadian housing never became as over-extended as U.S. housing, and the Canadian bank bailout was [...]